It also gives a small boost to the global boom for biofuels, which have gained favour internationally as consumers seek cleaner and more secure alternatives to US$60-plus oil.

BP will produce 110 million litres of tallow-based biodiesel at its Bulwer refinery in Queensland by 2007, which it will use to produce around 2 billion litres of 5 percent blended fuel.

It will also purchase 80 million litres of ethanol a year from privately owned Primary Energy's plant in Kwinana, Western Australia, from 2008, as well as 23 million litres from Australia's biggest sugar miller CSR over the next two years.

Earlier this month Australia's leading car makers declared all locally made vehicles capable of running on petrol blended with 10 percent ethanol, an alcohol most often made from grains and sugar cane and blended to reduce tailpipe emissions.

Gasoline stations selling biodiesels and ethanol blends are mushrooming across the country, while ethanol production rose 44 percent year-on-year in the second half of 2005, after a government taskforce approved 10 percent ethanol-blended fuels.

A A$37.6 million (US$26.9 million) government capital grants scheme has also seen several new ethanol plants, focused in Australia's sugar-rich northeastern Queensland state, line up to begin production and supply expected demand from refiners.

Australia's independent sugar growers have lobbied for years to see an ethanol industry to support their activities, which are now benefiting from a surge in sugar prices driven by demand for clean fuels.

TARGETS IN REACH

BP's deals are likely to foreshadow similar moves by fellow refiners Caltex Ltd., Shell and Exxon Mobil after all pledged to help meet the government target, which industry observers consider to be easily achievable. At 350 million litres, the target represents around 2 percent of current fuel consumption levels by 2010, in line with existing targets in some US states, as well as in the European Union.

But the E.U. is looking for a 5.75 percent biofuels share by 2010, while the I.E.A. says under the most optimistic scenario, ethanol could account for 10 percent of world gasoline by 2025. After Brazil, the United States is the world's largest producer of ethanol, while the EU, mainly through France and Germany, is the world's biggest producer of biodiesel, produced from fats or vegetable oil and compatible with any diesel engine.

US President George W. Bush gave a boost to green fuels by appealing for improved technologies that could help cut Middle East oil imports by 75 percent by 2025.

In Asia China is the third-largest ethanol producer, while shares in plantation companies in Indonesia, Malaysia and the Philippines have soared on demand for palm oil used in fuels.

Ethanol will be used to make 10 percent blended fuel at BP's terminals across Australia. BP's overall Australian fuel production, which operates two refineries with combined capacity of 226,000 barrels of oil a day, will stay at the same level.